by RA Dr. David Elvira
1. Introduction
Various rules have endeavored to make Spanish taxation attractive to non-residents. Clear examples of this are taxation of foreign securities’ holding entities and the Canary Islands “Special Zone”.
Act 62/2003, the Spanish Budget Act for 2004, introduced an important tax novelty. People who transfer to Spain for work an earn high incomes will obtain favorable tax treatment for the first five years.
This legislation seeks to foster or encourage moves to Spain by executives, and even to capture new “brains”, such as scientists who may receive favorable tax treatment if they transfer to Spain.
This new regulation breaks down and blurs the traditional distinction between real obligation and personal obligation, which is also considered in other tax systems. Thus, non-residents are subject to the Spanish tax system only for income understood as earned in Spanish territory, while residents in Spain pay taxes for their worldwide income.
2. De facto assumption.
The particular tax treatment does not apply to all executives or employees who move to Spain for work, but rather only to those who meet a series of requirements, the most imortant of which are the following:
a) They have not been residents in Spain for the last 10 years. This prevents an executive who has been in Spain for a year from being entitled to this new tax system.
b) Transfer to Spanish territory as a result of a labor contract. The person who endeavors to benefit from this new system must have a job contract. The law does not distinguish between ordinary labor contracts and top executive contracts, which under Spanish law are special labor relationships. This could be interpreted to mean that the contracts of top executives could likewise benefit from this system.
3. Work indeed performed in Spain. Here we face a legal expression that can be unclear in many cases. The circumstances of the specific case should be analyzed to determine what must be understood as work indeed performed in Spain – this, in a current economic scenario characterized by internationalization, travel, and business activities by executives in various countries.
4. Work must be performed for a firm or entity residing in Spain or for an establishment permanently located in Spain that belongs to an entity not residing in Spanish territory.
The law does not clarify if the contract must be signed with the Spanish firm or with a company of a group that that may have its headquarters in another country. While this circumstance should not prevent the system from being applied, the specific circumstances of the case should be analyzed, before applying such systems.
5. There must be no coinciding exemption for earned income. In other words, this system does not apply to earnings that may be exempt by another income-tax rule.
3. Consequences.
a) Taxation at the general rate for non-residents, which is 25%.
This means very favorable tax treatment, given that the maximum IRPF (personal income tax) rate for residents is 45%, which applies for income starting at 90’000 Euro.
b) Taxation as non-residents without deductibility of certain expenses or the minimum exemption.
The canceling entry, which is of minor importance for high income, is that non-residents cannot deduct certain expenses from the tax base, such as contributions to social security.
c) Taxation only on income obtained in Spain and not on worldwide income. Income earned in other countries is not included in the tax base of the Spanish income tax.
d) As regards the tax on net worth, the real obligation will be taxed, meaning only the net worth located in Spain.
e) People who meet these requirements will be able to benefit from this system for a term of five years, as from their transfer.
This is not a compulsory system. The taxpayer must exercise the options for this system before tax administration.
4. Conclusions.
Technically, this legislation is based on a contradiction. It treats a person who is a resident as a non-resident.
Internationalization of the economy and new technologies have created a situation in which placement of executives is defined not only based on location of the firm’s centre of power or administration, but also on other factors such as cities with quality of life, a good climate, and a tax aspects.
From this perspective, this new legislative modification opens up some very interesting possibilities for executives or workers who must or can move to live in Spain.
The the three S’ of “sol, sangría y siesta” (sun, sangría, and siesta), we could also add the “T” of taxation as an appealing aspect of the country.
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